My Take: Welcome to the Downward Slope of Peak Oil

The economic world was agog yesterday with the sudden and unexpected announcement that the 28-nation International Energy Agency announced that they would release 2 million barrels of of oil daily for the next 30 days.

Many welcomed this development, for its impact on gas prices and economic growth, but were stymied why it should occur. The IEA stated that “supply disruption has been underway for some time and will only become more exacerbated with the normal seasonal increase in refiner demand through the summer.”[1] Many commentators see the ongoing conflict in Libya and the lingering effects of the Arab Spring as the cause of this disruption. What is also disconcerting, and the reason for my own comment on the subject, is that “the IEA’s announcement comes…despite assurances from OPEC’s biggest producer Saudi Arabia that it would lift supplies unilaterally.” [2] There can be only one conclusion….

Welcome to the downward slope of peak oil…where available supplies diminish, technology must be used to extract the dwindling and intransigent sources, and we must adapt or die as economies!

The previous two IEA actions of this kind were in response to the source disruption of the First Gulf War (when Iraq invades Kuwait in 1990, for the Gen Y crowd) and the refiner disruption after Hurricanes Katrina and Rita in 2005.[2] I am not convinced that the Libya shutdown (and with it, commentators mention, a source ofthe preferable light sweet crude oil) since Libya’s output is minimal…given that LSC is marketed under aegis of the most historic source: Brent (North Sea) and West Texas Intermediate. Also, the refiner backup argument does not hold its weight since this is an annual phenomenon (for those drive regualrly, this is why summer gas is more expensive than wintertime…and blame California and its air standards, by the way).

What compounds, and points toward the true reason, is that this release is the LARGEST of the three since 1974.[1] “In the 1990-1991 Gulf conflict when Iraq invaded Kuwait much larger volumes of crude were shut [down]”[3] but the US Strategic Petroleum Reserve released only 17 million barrels then. After the one-two Gulf Coast hurricane punch knocked out New Orleans and Houston (as well as offshore drilling), the SPR released 21 million barrels to offset downed refiner output. But this year, the US is slated to release 30 million barrels (50% of IES total and 4% of the SPR).[4]

Why such a dramatically unpredicted action without a clear rationale? It would appear that Saudi Arabia cannot keep the extra-OPEC promises it makes. The 2 million barrels/day they proposed to produce seemed to have come in short.[5] When they lost their battle in the OPEC meeting, the Kingdom made the bold promise, but can’t deliver…is it so off-the-wall to suggest that they asked their consumer-nation ally (i.e. the US) to cut them some slack and let them save face? In other words, “available supplie diminish” – the first characteristic of peak oil.

Which brings us to the elephant in the room: the age of oil depletion. Recently, American cable audiences have been told that “clean coal is America’s future energy source” and “We at Company X are working to develop new sources of oil from Canada”…in other words, “technology must be used to extract the dwindling and intransigent sources” the second characteristic of peak oil.

So how should we proceed? “We must adapt or die as economies!” The road ahead is a hard one, but if we take a page from weight-loss programs, we can get healthier with a few steps:

Eat less – we must decrease demand for oil – major culprits: transportation, both individual and industrial, and energy. We as Americans (and the rest of the developed world can tag along too!) must change our consumption habits. First, drive less and ride more – we must make efforts to encourage the development and use of public transportation, moving closer to main lines and core cities. Second, get green – we need to advocate with the only voices we have: our pocketbooks! Buy products that reduce packaging (i.e. useless weight) and recycle/reduce/reuse as much as possible – the trucks/trains/planes have to run, but they don’t have to burn as much oil! Third, go dark – use that Daylight Savings Time for good purposes: open your blinds (but put on some pants first!) Again, pay for products that encourage good energy practices – caulking for windows/doors, alternative energy credits, maybe even a solar water heater or electic panels!

Exercise more – discipline, that is. I usually drive around with my windows cracked instead of using the A/C…and I live in the most humid palce on earth, central South Carolina. There are many ideas for reducing your own personal gasoline waste…feel free to suggest some other in the comments!

And take some supplements – We also need to advocate government support of the economic transition. Public transportation is just that: public…we need to request/demand its construction or extension. Alternate forms of power, like hydroelectric and solar, require up-front assembly…guess it’s time to bring back the WPA (if I ever run for public office, hold me to that promise!) Finally, subsidies are not inherently bad – they just need to be tied to a benchmark, like penetrance of the subsidized power source or technology in the market (i.e. decreasing support as more market share is absorbed).

I remember clearly when gas prices were about one dollar (I remember 90 cents a gallon at one time!)…and when they crossed $2 (Spring 2004)…and when they crossed $3 (Summer 2008…were briefly above after Katrina, but sustainably so after 2009, I think). We must adapt or die…paying $10 a gallon like Europe!

I also highly suggest that you find and watch Oil Storm, released in June 2005 (and I thought almost fulfilled with Katrina!)…I fear the the end (economic battle with Asia) is the next crisis in our future….